Summary

On today’s episode, we have Mike Ferranti Founder and CEO of Endai. In this episode, Damian and Mike detail how to transform your business by acquiring not just any customer but customers that buy like your very best customers do today. Damian kicks the episode off with asking about the right way to look at your customer database because many companies just look at the average customer. Mike starts off his answer with an expression, “The average is a lie.” He continues his explanation, “The problem with the average, of course, is it’s not a very robust statistic at all. And in the process, that average becomes sort of a belief about what all customers look like.”

So what should I be looking at you might be asking, well Mike says, “A more robust statistic would be the median.” This is because taking an average is saying all customers are equal. As we all know every customer is different

Next, Damian brings up what he calls “Most Valuable Buyer (M.V.B) Law” – basically The Pareto principle: 20 percent drives 80. Mike believes that it might even be 15 percent and that it drives more than 80 percent, it drives all your profits.

Damian then asks, “Well what if we could turn that 15 percent of your database that is M.V.B’s into 30 percent?”

Well it would transform a business. You may be asking for an example of a company that does this the right way and Mike drops a great on, Apple. Mike explains, “one of the things that Apple has done that maybe no one has ever done before is, they have acquired great customers at scale, and they have an uncanny ability to get what might be a more average customer to spend like a great customer. And what I mean by that is, Apple customers spend more and they spend more often.”

After that Damian asks an important question, “Does it cost more to acquire an M.V.B. versus a regular customer?” It turns out that both Damian and Mike agree that it costs about the same to acquire these M.V.B’s. The thing that makes acquiring M.V.B’s stand out is the return on investment or ROI.

Mike then breaks down his framework on how to identify and get those prospects to convert. Listen to the episode to find out how.

Finally, Damian brings up the last step of an M.V.B acquisition plan, having a bounce-back plan in place to get a second purchase. Mike gives a great breakdown of all the benefits of M.V.B’s and one of those benefits are that bounce back purchases come faster when you market to M.V.B’s. This is why have a bounce-back strategy and stream set-up is so important.

What follows is a lightly edited transcript of Episode 12 of the Inevitable Success Podcast with Damian Bergamaschi and special guest Mike Ferranti. (Listen Here)

Transcript

Damian: All right, so the last episodes, we spoke about new customer acquisition and scaling it up. And today, I want to dig deep into the types of customers that we go after.

Mike: So that’s a good place to start because one of the first things that I think is worth thinking through is, is there more than one type of customer when you acquire customers anyway? And most brands we’ve found are really focused on acquiring a certain number of customers or acquiring a customer at a specific cost per order- or cost per acquisition. And that’s a really good place to start. That’s the logical place to start. In the modern age of database marketing where many more organizations are developing intimacy with what a customer is actually worth not just on the first sale but over time and developing confidence in those metrics and those analytics.

Now you could start to think about a high-value customer versus a low-value customer. And so in very large enterprises, they’ve been doing this at scale for a fairly long time. And I remember in the early, early 90’s or late 80’s even, we were doing an analysis of customers that we would segment into buckets like cost control. So customers that just wouldn’t spend and would really go through great lengths to avoid paying fees in the finance business or buying at full price or anything that would really be good for building margins, and we would differentiate those from good customers, and we would differentiate those from high growth customers. Today, we can really dial it into a distribution by the total economic value that each customer has.

Damian: Maybe even more so like the potential value that those customers have.

Mike: And that’s really the ultimate, is when you have enough of them of each big category and your distribution of customer value. Now you can start differentiating and seeing where there is heterogeneity between them so that we can begin to predict and forecast future value of that customer. And if we could use that to inform the kind of customer we can get, that’s really the Holy Grail.

Damian: So I want to dig into the nature of customer databases and how they normally look because it’s tempting to look at your average customer, but there really is no average customer.

Mike: Yeah. One of our favorite expressions is “The average is a lie.” So “average” is a shortcut that we like to take as humans. Maybe we’re lazy, but it’s a good way of describing a population. The problem with the average, of course, is it’s not a very robust statistic at all. And in the process, that average becomes sort of a belief about what all customers look like.

So this is a very common issue in statistics. A more robust statistic would be the median. So we like to move you off of average and start thinking about the median customer. That’s a little more valuable. But the value we can create when we use database marketing and segmentation is in discerning what makes customers different. Whereas when we talk about the average customer we’re using a shortcut to sort of make them all the same. And the reality to your point, I think, is we didn’t actually make them the same at all. They’re still very different. We’re just blind to those differences. And that’s where opportunity exists– is in exploiting and understanding those differences because those become the insights or the basis for insights that you can use to acquire a better customer.

Damian: So, I know that in looking at hundreds of databases, there’s typically a very small minority of the database that drives the majority of the revenue. And those are your Most Valuable Buyers. We’ve even coined the phrase “The M.V.B. law” that- basically The Pareto effect: the 20 percent drives the 80.

Mike: Sure. Yeah, and sometimes it’s even less than that. Sometimes it’s more like 15 percent. You say it drives the 80 percent, but it’s even bigger than that. It drives all your profit.

Damian: Right.

Mike: So you may use those low-value, one-time buyers if you’re acquiring them inexpensively enough. They may be value in terms of covering costs, and that’s how a lot of brands look at it. But it’s the M.V.B.s that carry your profit, and when you take care of those M.V.B.s –i.e. communicate with them effectively and actually have a relationship with them over time– the growth and value of that M.V.B. typically drive the growth of the whole business.

Damian: Yeah, and this is where it gets very exciting in terms of new customer acquisition because if, let’s say that number is 15 or 20 percent, if you could focus all of your efforts and activities when you invest in new customer acquisition on getting the most valuable buyer, what if you could get, instead of 15, 30 percent of your business to be most valuable buyers?

It’s transformative.

Mike: Sure, yeah. Most folks might feel that is a nice bump. It’s actually, yeah, it is absolutely transformative. It will change the character of your entire customer base, and it will change the face of the business. So there really is nothing that could impact your business more than improving the caliber of the customer. So, we like to say “Great businesses are actually built on great customers.” Lots of times organizations sort of think in terms of- and I think this is a big shift- “Great businesses are built on great products, great brands, great people.” Well, I think those things are all true. Apple without the iPhone looks like a very different company, and it’s impossible to argue that you need great people to have a great business. But, none of it works without great customers.

And a great customer– let’s take Apple where the product and the brand are really in a league of its own. I would say Apple has succeeded where others haven’t. We can debate if it’s a great product or if it’s a good product or if it’s a very good product. We really could. There have been studies showing how when you put the same color treatment on interfaces between modern Android and iOS, many users couldn’t tell you which one is iOS. So they’ve gotten so similar. So is it still a great product? Well, clearly it’s a great brand, and that’s impossible to argue with.

But, one of the things that Apple has done that maybe no one has ever done before is, they have acquired great customers at scale, and they have an uncanny ability to get what might be a more average customer to spend like a great customer. And what I mean by that is, Apple customers spend more and they spend more often.

Damian: Well, it’s funny. I look at a lot of Google Analytics accounts, and I will always see that when I segment by…

Mike: Device. Yeah, brand.

Damian: Device, and I go down to iPhone. It is amazing how much more valuable that session is, and what’s even more interesting if you go deeper, and you look at who has the newest or latest iPhone at that time, that’s even better.

Mike: Forget about it. Right.

Damian: A little, an aside, a little trick right there if you’re looking to target somebody.

Mike: Yeah. Well, and that’s already been exploited by marketers. So if you shop on Priceline, you might want to hop off of your mac book and get on a PC because your prices will be higher when they do a browser sniff and determine you’re on Apple hardware.

Damian: That’s awesome.

Mike: They’ve been caught doing that, and it’s brilliant because they’re using that as a signal that this is a great customer, perhaps for us, because the way they spend is very different than other folks.

Damian: So, I’m going to bring it back to that point pretty quickly. One of the questions that somebody asked me the other day was, Does it cost more to acquire an M.V.B. or your Most Valuable Buyer versus a regular customer? And, I’ve had my own experiences with that where I’ve found that it’s actually pretty similar to acquire a great customer at the cost that it would acquire an average or below-average customer. But the 1 year, 2 year, and 3 year ROI of that acquisition is way higher.

Mike: No comparison. Yeah.

Damian: And I think that’s really the opportunity. You’re going to spend you know a finite amount of marketing dollars, and this is a lever that ultimately it goes somewhere because it could transform the very business.

Mike: Sure, sure. You know, another way to look at that is, all customer acquisition is pricey. I think many marketers, especially smaller marketers, are always out looking for “how do I get that $5 acquisition when my average acquisition cost is more like $200?”

Damian: It’s like the get rich quick.

Mike: (laughs) That’s right. That’s exactly right. And, rather than do the get rich quick approach, if you do the investing approach and get rich slowly…

Damian: Get rich scheme.

Mike: Right, you’re going to be much more successful. Same applies here in customer acquisition. So it’s always expensive to acquire a customer. Now expensive is a relative term, of course, but if you’re going to spend a significant number of dollars on acquiring a customer, shouldn’t you get a high-quality customer while you’re at it? And that’s a really important way to look at it. Number 1 and number 2, if you’re going to spend a lot on a customer, wouldn’t you prefer to get a customer who will spend more and spend more often over time?

Yeah. And the flip side of that is–and we’ll probably cover this in later episodes a lot more– where you start, that’s your benchmark. You can always drive down the cost of acquisition over time.

Let’s dig into maybe a framework of how to go out and acquire, not just new customers, but customers that have the profile to spend like your very best customers do today. And so, typically that starts with identifying your M.V.B.s -your most valued buyers.

Mike: Who they are.

Damian: Right. You have to understand who they are. Actually, why don’t you speak to that a little bit?

Mike: Yeah, there’s a few things. One is, when you say who they are, let’s talk about what that means. Oftentimes in organizations, there’s this narrative of who the best customer is. It’s very qualitative, and it’s a hunch is what it really is. And so, to do this at scale and to be successful consistently…

Damian: You’re talking about personas, or…

Mike: Yeah, personas. A lot of organizations still don’t have personas figured out, and so, really what you have is, it’s literally a hunch. So there are these brand stories about “our best customer is…”– and usually, they’re rich and beautiful or some version of that. And sometimes, that’s just not the case. So what we would do is, we would say “well, how do we develop that intelligence.

Now, one of the ways to do that, the most common way to do that, would be to enhance that customer record to go from their spending history- and maybe some basic information like their name and address which, by the way, are helpful in themselves- but we can enhance that customer with third-party data: lifestyle, offline spending, online spending, credit behaviors, media consumption. These things all can be signals that you can model to determine- or use machine learning to determine- what are the behaviors/attributes of those individuals that could most likely predict who that Most Valuable Buy alike customer is out in the wild.

Damian: Totally. And if you have that, and then you layer on, what do they typically buy when they become a customer? That’s huge because that’s the product that resonates with people that have high potential value. Very important to know. And also, maybe you have an advantage of when they buy. So you can look for seasonality in conversion rate.

Mike: Yeah. So Step 1 is defining the target, which is Who are they. And then Step 2 is, well once we have the target, we actually have to convert them. And we have to do that as efficiently as we can because it wasn’t cheap to find that target, especially if we’re going after a rarefied customer. So, what they buy can inform a couple of things. One is, it can inform: are they buying the high priced stuff? Is that what makes them more valuable? Do they just buy more often? And so maybe, it’s not just the high ticket items. So that’s intelligence that you need.

But even then, you have to be flexible, and again, you always have to keep thinking like a marketer. You’re now pursuing a customer who is your ideal, but you’re not necessarily their ideal yet. In fact, if we’re going for someone that we’ve de-duped from being in your database ever, we have no evidence that they’re even familiar with the brand. And so that’s where you get into what they buy/ when they buy. So I think your point about seasonality is really… it’s a bigger idea than most might think if they haven’t done this before. You need to stack the deck in your favor so that when you go to do this type of acquisition, they’re leaning into the purchase more than they might at other times of the year.

Damian: Yeah. A good example of this: we just had Valentine’s Day, I think it was this week. If you’re a florist, and you’re selling flowers. The conversion rate leading up to Valentine’s Day is going to grow and grow and grow. And the cost to send mail through your ESP to prospects is not going to increase. So that by definition means that there are certain times of the year where you have a cost advantage to go and scale up new customers or get really good benchmark data. That’s just one example. But, I think, it’s helpful to synthesize that for your own business.

Mike: Yeah. We’ve had clients that have said, “Look, why don’t we do this advanced form of M.V.B. acquisition? Why don’t we do this in my low season because I’m not getting customers, and it seems like we have that advantage right now with all this intelligence? Let’s go get customers in the down season and flatten out my curve.”

Damian: And that’s attractive because maybe you have some operations people that aren’t as busy, and it would feel good to get the volume.

Mike: It’s not to say that you can’t acquire them, but again, if you take that tailwind away, it will manifest in the cost per customer. And you just have to have eyes wide open going in if you do that. Generally speaking, you want to have every advantage in moving someone from “I don’t know your brand, and I am not a buyer of your brand” to “trial.” And that’s another important distinction. The goal really needs to be that we get someone to try the product.

Damian: Yeah, I like to start these types of campaigns in the season that stacks the deck in our favor. And then you can move to a more evergreen approach and throttled the investment accordingly. And also the costs that you pay throughout the year to hit an ROI that you’re comfortable with, but typically it makes a lot of sense to press when you have a conversion rate advantage. It’s a huge lever. All right. So we talked about that. So the next thing we had here is that you have to understand your M.V.B.’s channel preference because that’s how you’re going to go out and target them.

Mike: Yeah the channel preference will just help you understand: don’t send direct mail to a millennial, for example, is often the case, and for a less digital savvy crowd, you might want to use direct mail. I don’t know that there’s a true, hard and fast rule, but for each customer base, you will be able to discern some channel preference. And that could provide a lift. I think, regardless of the channel, I would then move to offer. The offer –and I think we’ve discussed it in other podcasts a little bit. Offer/message, but the offer or the value proposition for them to try your brand or product– It’s the most important thing you can get right or wrong– after the Target.

Damian: Yep. The perceived value in the eyes of the customer.

Mike: That’s a good point. That’s a really good point.

Damian: Yeah. So another little thing that I’ve observed is, picking the right product is really an important thing to do. You can have a very similar… what you would perceive as an offer: free shipping or 50 percent off, whatever it is, but if you pick it on the wrong product, it’s just not going to be effective because the perceived value is not there.

Mike: Yeah, oftentimes that’s a place where the marketer will have an expectation or a belief about what the right product for M.V.B. acquisition is. They might assume if we are going after “high rollers,” then we should just get the most expensive product in the catalog or on the website, and we need to give them that because they don’t care about money, they’ll spend. I’ve heard some version of that narrative many many times.

The flip side is that that can happen. That can work, but within that M.V.B. target, you will still have different levels of spending that the consumer will make on the first try. And again, “trial” is very very different from repeat purchase. So basically everything you know about how you sell to your existing customers, you have to really park that at the door and leave it there when you start thinking about how you’re going to acquire net new customers, much less the M.V.B.s who are the most sought-after customers there are.

Damian: Yeah, and if they’re high potential customers if you’re doing a good job targeting the right customers or prospects, you’re going to make it back in the lifetime value. Most of the time, very soon, six months to a year. So, you just don’t want to be limiting in that thinking. Alright, so the next thing that I had here was: I’ve also found Facebook very helpful to do rapid testing of different message and offer, even if that’s not the ultimate channel that you’re going to use, because it gives you such fast real-time feedback of the product, the message, and sometimes the type of creative that you use. And that can really help when you go to roll out, let’s say, something like direct mail that it’s hard to get that quick learning -just another little trick that I found work really well.

Damian: And also to dovetail with the lifetime value, you got to get that second purchase. You get them to “trial.” You have to think about: that second purchase is almost part of the acquisition upfront because what you’ll find in most databases is most people don’t buy twice. They’re one-time buyers. But these people have the potential to be very very valuable customers. So, it doesn’t stop at the first sale. You have to have a strategy or bounce-back plan to get them to a second sale.

Mike: Yep. Once you have that net new customer- M.V.B. customer- I think it’s really– an expression I like to use is: M.V.B.s have fringe benefits. And the biggest of those benefits are, your bounce back purchase should come faster. The average order size should be higher, and the ongoing frequency of purchase and total spend will be much much higher. So those fringe benefits are what makes M.V.B.s so game-changing. The other side of that is, and just to break this down for a minute, if you have a customer that has all those attributes, it’s reasonable to assume– and you could measure this of course– but it’s reasonable to assume someone who buys frequently and spends a fair amount with your brand, that’s also a happy customer.

Damian: I heard about this too.

Mike: He’s now up to 52% off of his next Tesla. And that says a couple of things. This person is so thrilled about the product and so engaged in promoting the brand that they’ve referred you know dozens and dozens of customers that are going to spend $100,000 a piece on a Model S. So, it’s really powerful. And that’s another dimension. You want to have happy customers. The most valuable and the right customer is much more likely to be a happy customer than one who makes one purchase, expects the world of it, thinks they overspent in the first place, and really can’t be quite as happy. But the behaviors of the M.V.B.s are also the behaviors of satisfied customers who tell their friends.

Damian: Yeah, we’re going to cover this a little bit in the ROI episode which I think is next. But sometimes I’ll call this the W.O.M. multiplier: Word of mouth, and you can build it into, either as a multiplier of the ROI of acquiring each customer, or even like a deviser that reduces the CPA of acquiring a customer because if on average each customer you got referred another customer, you can cut your CPA in half. So, it doesn’t typically work out that aggressively, but it is a real metric if you have a brand that can leverage that effect. Anyhow, this was really a fun topic to go into. If you guys have any questions about it, feel free to email Mike or me. Our personal email addresses: mine is dbergamaschi@buyergenomics.com and

Mike: mferranti@buyergenomics.com

Host: Damian Bergamaschi

Special Guest: Mike Ferranti

Mike is the Founder and CEO of Endai, brings 20 years of marketing, analytics and technology depth. He has developed solutions and software to major brand clients and niche marketers alike. Mike is a recognized thought leader in the database, search engine, email, and direct response marketing. He provides commentary and analysis to the media including Bloomberg TV, Brandweek, and DM News. Mike earned an MBA from The University at Albany and an Entrepreneurial Masters from the Massachusetts Institute of Te/p>